Notre Dame Law Review
Volume 39 | Issue 2
2-1-1964
Business Reciprocity and the Antitrust Laws
Hurley D. Smith
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Hurley D. Smith, Business Reciprocity and the Antitrust Laws, 39 Notre Dame L. Rev. 185 (1964).
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Article 5
NOTES
BUSINESS RECIPROCITY AND THE ANTITRUST LAWS.
I
Introduction
In the complicated area of antitrust law, recent government scrutiny of a
traditional nonprice-oriented, growth-fostering technique known as reciprocity
has caused considerable concern among corporate lawyers entrusted with the difficult duty of advising their "clients" as to the legality of competitive activities or
proposed acquisitions. As generally understood, reciprocity describes the practice
whereby firms, overtly or tacitly, make concessions to one another in order to promote their own business interests.' The best-known form of business reciprocity
is reciprocal buying, that is, the use by a firm of its buying power to promote its
sales. 2 In this context it involves nothing more than the simple idea that, "I will
buy from you, if you will buy from me," or the unspoken, "If I buy from him, he
will buy from me." An extremely important form is a type of three-way reciprocity
company A prodding company B to buy from C which is affiliated with A or
has close business relations with it. It is obvious that opportunities to practice
reciprocity are quite extensive and several surveys indicate the frequency with
which these opportunities are converted into organized reciprocal buying programs.3
Despite the antiquity and universality 4 of this practice, especially when it in1 "The practice is analogous in principle to the old-fashioned bilateral reciprocal agreements in international trade."
Hadley, more than sixty years ago, defined reciprocal trade- agreements
as "a relation between two independent powers such that the citizens of each
are guaranteed certain commercial privileges at the hands of the other." In
making such agreements, negotiators no doubt believe that they promote
their countries' interests. So it is with business reciprocity, except that one
of the parties may be confronted with a choice of the lesser of two evils
rather than the better of two attractive propositions.
Stocking & Mueller, Business Reciprocity and the Size of Firms, 30 J. oF Bus. U. OF CHcAGO
73, 74-5 (1957).
2 An example of a type of reciprocity that is not strictly reciprocal buying is found in
United States v. National City Lines, 186 F.2d 562 (7th Cir. 1951), cert. denied, 341 U.S.
916 (1951).
Here, several suppliers, among them, Standard Oil and General Motors, furnished capital
to defendant, a public transportation holding company which enabled it to monopolize local
bus lines in 45 cities. The defendant reciprocated by entering into requirements contracts with
these suppliers. The court held that this was a conspiracy to monopolize trade.
3 In Lewis, The Present Status of Reciprocity As a Sales Policy, 16 HARv. Bus. REv.
299, 311 (1938), the author's study reveals that over 50 of the 176 firms whose purchasing
agents responded to a questionnaire had set up definite procedures for handling reciprocal purchases and sales. Some companies designated their departments for handling reciprocity
problems as "trade relations departments." The Interstate Commerce Commission's report on
Reciprocity in Purchasing and Routing, 188 ICC 417 (1932), reveals that during the 1920's
and early 1930's the railroads generally resorted to reciprocity. They customarily allocated
the purchase of steel rails and coal in proportion to the freight traffic given them by different
steel mills. The record indicates that many railroads tried systematically to increase business
through reciprocal buying. Their purchasing departments notified their traffic departments of
the firms from which they bought, and the traffic departments used this information in soliciting traffic. Since shippers were sometimes persuaded to ship by a particular line when it was
not economical to do so, the practice "made the handling of existing traffic more expensive.'"
Id. at 434.
4 The Wall Street Journal, June 26, 1963, p. 1, col. 6, points out that in a recent poll,
51% of purchasing agents and 45% of the sales managers answering, reported reciprocity influenced their companies' buying and selling.
In some industries, such as chemicals, steel, and petroleum. All executives responding to the questionnaire said reciprocity was of factor. Over
25% of the respondents, concentrated in chemicals and petroleum said they
used three-way reciprocity.
The Wall Street Journal, Dec. 4, 1963, p. 1, col. 6, reports that last year, executives
charged with handling reciprocity for their corporations formed an organization called the
Trade Relations Association. The group has 113 members. Fenton Truck, head of a consulting firm that sometimes advises clients on trade relations, estimates that some 500 companies
use the technique on an organized basis, accounting for as much as 20% of total sales volume,
"and often the most profitable and stable 20%."
NOTRE DAME LAWYER
volves large companies, both the Justice Department and the Federal Trade Commission have recently charged that reciprocity may amount to an illegal restraint
of trade, especially where it is coupled with coercion. This note will investigate
the economic factors which make possible an effective plan of reciprocity and
the legal implications of the resulting effect on competition with emphasis on delineating where ordinary "mutual back-scratching" crosses the line into such illegal
realms as "restraint of trade" and "tending to create a monopoly." It will also
stress the mutual dealing possibilities arising from conglomerate mergersa corporate form which brings together companies in different lines of business thus
facilitating the so-called three-way reciprocity.
II
Economic Significance of Reciprocity
"Reciprocal buying is economically significant when its use enables a firm to
make sales that it could not otherwise make, or could make only at greater costs."5
It is a characteristic of imperfectly competitive markets, for in a purely competitive market, producers have no pecuniary incentive to seek out particular buyers,
or buyers to seek out particular producers. A good example of a purely competitive market, where nonprice-oriented competitive activities, such as reciprocity,
would be ineffective is found in the market for agricultural products. Thus, "[A]ny
farmer can sell all he produces at prevailing prices, and any buyer can obtain at
prevailing prices as much of any farm product as he wishes to buy.' 6 However, in
an imperfectly competitive market, where a few sellers provide the entire supply
of any commodity, resort to reciprocity is a very advantageous way to increase
sales. But, while reciprocal buying can be effective only in imperfectly competitive
markets, it is not equally adapted to all markets of imperfect competition. Its effectiveness depends on the existence of one or more of the following conditions.
First, the suppliers or potential suppliers of a firm must be its potential customers or potential customers of a company it controls. Unless these suppliers buy
the goods made by the firm wishing to practice reciprocity, or by a company it
controls, they do not lend themselves readily to such arrangements. Firms selling direct to consumers or to distributors of consumer's goods cannot use reciprocal
buying effectively, "Their suppliers are at best only small potential customers,
and their customers may have nothing to sell to them." 7 Thus, production for sales
to industry rather than for direct sales to consumers would appear to be a necessary condition for effective reciprocity."
The second condition is what economists refer to as, "[A] sloping demand curve
in an industry in which marginal costs are constant over a wide range of output."9
Over the long run, aggressive firms are unlikely to accept their demand curves as
uncontrollable external factors and will frequently resort to reciprocity to expand
5 Stocking & Mueller, supra note 1, at 75.
6 Ibid.
7 Ibid.
8 An example of this is given by Stocking & Mueller, supra note 1, at 75-6, using General
Motors:
In the early 1920's when General Motors made nothing but automobiles, trucks, and automobile accessories, it had little use for reciprocal
buying, because through its distributors it sold its output largely to the
final consumer. Although it was heavy buyer of raw materials, automobile parts, shipping services and labor, its suppliers bought relatively few
cars. It could not readily use its purchasing power to coerce or persuade its
suppliers to buy heavily from it.
9 Id. at 76. The demand curve is the graphic depiction of the relationship between
supply and demand. This relationship, in a market characterized by imperfect competition, is
that demand will increase as prices decrease (within the relevant capacity). When this relationship is portrayed graphically, the prices are on the left vertical axis and quantities on the
horizontal, with zero at the vertex. Thus, at the highest price the demand is negligible; as the
price decreases, the demand increases, and the plotting shows a sloping effect from left to right
Marginal costs, or variable costs, are the additional costs incurred in producing one more unit.
NOTES
sales, thus "moving the demand curve to the right?' 10 resulting in growth at the
expense of rivals who fail to work out long-term reciprocal arrangements.
A third condition conducive to reciprocity, although not essential to it, is surplus
capacity. Thus when an industry is overbuilt, or demand slackens, for example,
as a result of a recession, a firm may be tempted to get business by cutting prices.
But since rival firms are likely to meet such price cuts promptly, "A firm that can
increase its sales through the use of its buying power may force less fortunate firms
to bear the main burden of declining demand.""A fourth condition conducive to the effective use of reciprocity is, "[S]ome
lack of symmetry in the market."' 2 Thus, if all firms in an industry were of the
same size, sold identical products, and bought identical inputs, reciprocal buying
would give none an advantage over any other. "Each firm could use its buying
it with equal effectiveness, none
power as effectively as any rival. And if all used
3
could expand sales at the expense of others.'
A fifth, and perhaps most important, factor conducive to reciprocal buying
is diversification. "The large diversified firm has better opportunities for using
reciprocal buying than the single line producer."'"4 As was previously pointed out,
to use its buying power readily to increase sales, a firm must find a potential buyer
for the goods it sells that is also a potential supplier of the- goods it buys. A firm
that makes many products can more readily do this. If it is a large purchaser it is
much easier to persuade its suppliers to buy from it.
A diversified firm may [also] use its purchases in making one product to
push its sales of others; and if, as is not infrequent, a diversified firm has a
near-monopoly of some product ... it canuse its purchases of raw materials
its sales of products encountering more nearly
for this product to increase
competitive market.' 5
Legal Significance of Reciprocity:
The legal significance of reciprocity lies in its effects on competition and, thus,
it was first attacked under section 5 of the Federal Trade Commission Act' 6 which
makes unlawful unfair methods of competition in commerce. However, the obvious tendency of reciprocity, as a growth-fostering technique, to create situations
where monopoly power could be effectively utilized, has led to recent government
attacks on the practice under the Sherman Act 17 and Section 7 of the Clayton
Act.18 Cases under these three sections will be examined in order to determine the
factors necessary to sustain a complaint under each section with special emphasis
on the necessity of overt activity or coercion on the part of the instigator of the
plan of reciprocity. In this context, special emphasis will be placed on the merger
area, i.e., situations where the corporate structure necessary for three-way reciprocity
is in existence, to determine whether the mere existence of substantial buying power,
or economic leverage in a particular market is, by itself, so potentially anticompetitive in the reciprocity area as to require some government regulation.
III
A. FederalTrade Commission Act Cases:
Section 5 of the Federal Trade Commission Act makes unlawful, "[U]nfair
methods of competition in commerce, and unfair or deceptive acts or practices in
10 This refers to a totally new supply-demand relationship occasioned through some extrinsic force. The higher quantity will be purchased at the same price whereas before it was necessary to lower the price to achieve the same sales volume.
11 Stocking & Mueller, supra note 1, at 76.
12 Ibid.
13 Ibid.
14 Ibid.
15 Id. at 77.
16
17
38 Stat. 719 (1914), as amended by 52 Stat. 115 (1938), 15 USC § 45 (1958).
26 Stat. 209 (1890), as amended by 50 Stat. 693 (1937), 69 Stat. 282 (1955), 15 USC
18
38 Stat. 731 (1914), as amended by 64 Stat. 1125 (1950), 15 USc § 18 (1958).
§§ 1-2 (1958).
NOTRE DAME LAWYER
commerce,"' 19 and the Federal Trade Commission, which is responsible for the
20
administration of the Act, is empowered to enforce it with cease and desist orders.
Three landmark cases, which arose during the 1930's, deal specifically with business
reciprocity'as such an unfair method of competition and indicate the economic and
legal significance of reciprocity as a method of foreclosing competitors from a specific
market. These cases also indicate some of the cruder and more obvious types of
activities utilized to make a plan of reciprocity effective.
Thus, in Waugh Equipment Co., 11 the corporate respondent was a minor
manufacturer of draft gears for railroad cars. Two high officials of the large meat
packing concern, Armour & Co., were large stockholders in Waugh, and because of
their position as traffic directors at Armour, commenced to use this company's vast
power as a major rail shipper to induce railroad companies to buy draft gears from
Waugh. The effectiveness of this plan is indicated by the fact that in 1924, when the
reciprocity campaign commenced, Waugh's gear was practically unknown. As a direct
result of this reciprocity, the company was enabled to vault from obscurity to industry
leadership in only six years. Waugh's sales increased in this time from less than one
percent of those sold for new freight equipment to over thirty-five percent of the
market.
The methods used were to give traffic officials of the railroads promises and
assurances of substantial increases of freight traffic by Armour & Co., if the railroads
would purchase Waugh gears. These officials, in their dual role as Waugh stockholders and Armour officials, also utilized threats of withdrawal and actually did
withdraw substantial amounts of traffic from those railroad companies which refused
to purchase Waugh gears. In finding a violation of section 5, the Commission pointed
out that other draft gear manufacturers made their sales presentations to the mechanical, operating, and purchasing departments of the railroads, rather than to
their traffic departments, and that the factors ordinarily considered by the railroads
were price, quality and salesmanship 2 2 The Commission further found that the
efforts of the Armour officials on Waugh's behalf resulted, in many instances, in railroads purchasing Waugh gears in contradiction to the recommendations of their
mechanical officials and in disregard of the bids of competitors. These competitors
had no appreciable traffic to offer the railroads and were therefore unable to meet
Waugh's competition.
It was pointed out in this case that the combination of Armour's size with the
fierce competition between the railroads, who were all eagerly seeking routing by
their respective roads, accentuated Armour's power over the railroads. The combination of this economic power with the coercive reciprocity program designed to sell
Waugh gears, constituted a clear example of unfair competition in commerce. The
Commission concluded that Waugh and the Armour officials had, "Maken advantage
of a competitive weapon, oppressive and coercive in nature," 23 which tended to
unduly suppress competition by preventing the customers to whom Waugh and its
competitors were trying to sell their products, "[F]rom exercising their free will and
judgment in determining which device is the most efficient and would best serve
their needs at the lowest net cost over a period of time. ' 24 The commission stated
that this then:
[I]njected an element in the competitive field . . . which is unfair and abnormal, and tends to reduce the efficiency and economy in the production
and sales methods of competing manufacturers and gives to the concern that
19 This section reads: (1) Unfair methods of competition in commerce and unfair or
deceptive acts or practices in commerce, are declared unlawful.
20 (6) The commission is empowered and directed to prevent persons, partnerships, or
corporations . . . from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.
21 15 FTC 232 (1931).
22 Id. at 245.
23 Id. at 246-7.
24 Id. at 247.
NOTES
controls the largest volume of freight traffic an unfair advantage that will
more than offset the higher efficiency in the production and sales methods of
competing concerns which control no such traffic . . . and [thus] hinder[s]
customary, and
and restrain[s] the freedom of competition in the natural,
25
prevailing channels of trade in the . . . industry.
The next section 5, Federal Trade Commission Act case dealing with reciprocity
was Mechanical Manufacturing CoY6 Mechanical Manufacturing Co., a maker of
railroad draft gears, bumping posts and coupler centering devices, was controlled
by important employees of the large packer, Swift & Co., along with the Swift estate
and members of the Swift family. It is important to note that two of the stockholders of Mechanical were transportation officials of Swift and were in direct charge
of the latter's traffic negotiations with the railroads and were in control of the freight
car routings of its products and those of its subsidiaries. This involved a business
in meat products and by-products carried on through more than 500 branch
distributing warehouses and the utilization and control of approximately 7,500
refrigerator cars.27 As in the Waugh case, the volume of freight traffic thus controlled
by these transportation officials was used to induce purchase of Mechanical's bumping posts, draft gears and coupler centering devices in preference to those of competitors through promises and assurances of shipments or increased shipments for
the lines concerned, and in some instances threats of withdrawal and actual withdrawal of traffic from lines of companies declining such purchases. This persuasion
was also effectuated by these officers, with the assistance of Mechanical Manufacturing Co., by personal ii terviews and "official" letters informing traffic and other
railway officials that the packing company "family" or "interests" controlling it and
owning Manufacturing would be favorably disposed to railroads using this corporation's gears. It was also stated in these interviews and letters that they expected their
"railroad friends" and those carriers whom they "patronized liberally" to buy products on a "reciprocity basis" or "reciprocate" through buying a portion or specified
portion of their requirements, and that they were disappointed, or dissatisfied with
traffic officials of roads which failed to purchase the articles in substantial or specified
numbersY8 They also advised the railroads that other competing roads were using
Mechanical's products in substantial quantities. On these facts the Federal Trade
Commission found an illegal combiiiation of substantial economic leverage combined
with overt coercion amounting to an unfair method of competition which, "[R]estrains the freedom of competition
in the natural and customary channels of trade
29
inthe draft gear industry.
The last Section 5, Federal Trade Commission case in this area is California
Packing Corp.30 California Packing was one of the largest packers and. distributors
of food products in the world. 31 One of its subsidiaries was Encinal Terminals, a
corporation operating wharves, sheds, warehouses and switch tracks on San Francisco Bay for the purpose of handling rail and steamship freight at the waterfront
in competition with a number of similarly engaged terminals. California Packing
was a large purchaser of raw materials and manufactured products, such as wood,
paper and fiber boxes, containers, cartons, tin, steel, copper and paint. The Commission found that the purchasing agent for California Packing, the vice-president,
a director, and a general manager of the subsidiary, Encinal Terminals, and a former
traffic director of the terminal corporation, who was now the traffic manager of
California Packing, entered upon a plan of using the tonnage of freight shipped by
the corporation over steamship lines, together with the buying power of California
Packing, to influence routing of tonnage to Encinal. Thus, steamship. companies
25 Ibid.
26 16 FTC 67 (1932).
27 Id. at 71.
28 Id. at 72-3.
29
30
31
Id. at 75.
25 FTC 379 (1937).
Id. at 382.
NOTRE DAME LAWYER
were coerced into diverting freight tonnage to Encinal even when the move was
uneconomical for them, by the employment of California Packing's power as an
important shipper. California Packing also compelled their suppliers of raw and
manufactured materials to utilize the facilities of Encinal Terminals to the exclusion
of Encinal's competitors, even though these suppliers, had it not been for these
coercive activities, would have normally routed their products through other competing terminals on San Francisco Bay. Again this coercion was effectuated by
assurances of increased purchases from these concerns if they directed shipments
to Encinal, and threats of reducing or discontinuing purchases from those concerns
which continued to route shipments through competitive terminals. Even California
Packing's competitors were exploited by the device of soliciting their customers and
suppliers to induce them to divert shipments through Encinal. 2 The Commission
found that the principal consideration for California Packing's purchases from its
suppliers became, "Whe volume of tonnage routed by said industrial concerns through
the said Encinal Terminals . . .instead of the usual and normal competitive con-
siderations such as quality, service, and price;"33 this was clearly an unfair method
of competition in the terminal business which had anticompetitive effects in the food
packing business, i.e., the routing through Encinal enhanced California's revenues
by reducing their distribution expenses, "[T]o the unfair competitive disadvantage
of ... competitors."3 4
These three decisions represent specific applications of the general principle that
abuse of large buying power to restrict competitive market opportunities is illegal.
As the Supreme Court has held:
Large scale buying is not, of course, unlawful per se. It may yield price
or other lawful advantages to the buyer. It may not, however, be used to
monopolize or to attempt to monopolize interstate trade or commerce. Nor
may it be used to stifle competition
by denying competitors less favorably
situated access to the market.35
This quotation pinpoints precisely the evil of reciprocity as demonstrated in the
above cases. It transforms substantial buying power, "[I]nto a weapon for denying
competitors less favorably situated, access to the market."30
It distorts the focus of the trader by interposing between him and the
traditional competitive factors of price, quality, and service an irrelevant
and alien factor
37 which is destructive of fair and free competition on the
basis of merit.
In the above cases, the alien and irrelevant factor was the tremendous purchasing
power of the large controlling, or parent corporation used as a lever to induce its
suppliers, who had need of the services or products of the controlled company, to
reciprocate by using these services or products to the exclusion of those of competitors. Thus, sales were made in this way where they would not ordinarily have
been made because of the fact that the competitor's price, quality and service package
was often superior to that offered by the controlled company.
These cases also indicate the way in which diversification may enhance the likelihood that reciprocity may be practiced to stifle competition. As was pointed out,38
a single-line corporation is far less likely to both buy from and sell to another corpo32
Id. at 398.
Said corporate respondents . . . have spied upon the business of . . .
competitors .. . by securing from said Encinal Terminals the names and
addresses of customers of said competitors, to enable ... corporate respondents to bring pressure and influence to bear upon said customers, to divert
their shipments of products purchased from said competitors, through said
Encinal Terminals.
33 Id. at 398-9.
34 Id. at 398.
35 United States v. Griffith, 334 U.S. 100, 108 (1948). (Emphasis added.)
36 Consolidated Foods Corp., FTC Docket No. 7000, Trade Reg. Rep. FTC Complaints,
Orders, Stipulations, Par. 16,182 at p. 20,977 (1962).
37 Ibid.
38 See note 7 supra and accompanying text.
NOTES
ration than one that is diversified, i.e., one that deals in a variety of product or service
lines. Thus, the officials of Armour & Co. and Swift & Co. could not exercise reciprocal buying power over the railroads so long as their companies produced only meat
products, which the railroads did not consume. But once they established relationships with firms that produced railroad equipment, they could employ Armour's and
Swift's power as shippers of meat products to force the railroads to buy the equipment from the sources in which they were interested. It was precisely the lack of
diversification that prevented other equipment manufacturers from meeting the
reciprocity competition generated by Armour and Swift. Similarly, California Packing Corporation's use of reciprocity depended upon linking the purchase of supplies
and transportation for its food products to the operation of a wholly unrelated
terminal business. Thus:
Tic the extent that . .. diversification . . . produces an industry structure that facilitates and furthers reciprocal buying, it is likely to lead to the
most serious of anticompetitive consequences, viz., to confer upon large, diversified corporations a crushing weapon against small, single-line competitors.
The potential practical consequences are dramatically illustrated in the
Waugh case ....
9
What is proscribed by Section 5 is some activity or practice which interposes a
circumstance extrinsic to the worth of a product causing the most efficient producer
to suffer loss because of his inability to compete on this basis.40 Since this section
speaks in terms of acts and practices, and since the Commission has clearly pointed
out that what is reprehensible is the combination of large-scale buying power with
coercive activity, a reasonable conclusion would be that the mere fact that a corporation's size gives it economic leverage sufficient, aside from any activity on its
part, to induce reciprocation ("If I buy from him, he will buy from me") is not
sufficient to sustain a cease and desist order.
B. Sherman Act:
Conglomerate mergers are now being attacked under the Sherman Act on the
grounds that the utilization of reciprocal buying power had tended to create
monopolies in the carbonic gas, and the electro-diesel locomotive industries.
Presently, cases against General Dynamics and General Motors are being tried in
conjunction with complaints of violations of section 7 of the Clayton Act. In 41
a
complaint filed by the justice department against General Dynamics Corp.,
there is an alleged violation of Section 1 of the Sherman Act. General Dynamics
is the largest defense contractor in the United States; because of its size and diversification, it requires commensurately large quantities of goods and services from
others. It also subcontracts a substantial amount of government business in connection with defense contract awards. Liquid Carbonic Division, one of its subsidiaries, is the largest manufacturer and distributor of carbon dioxide in the
country. The complaint charges that General Dynamics had adopted a "Special
Sales Program" which was designed to, and did, utilize the extensive economic
leverage of General's purchasing power to coerce suppliers and subcontractors to
purchase carbon dioxide and industrial gases from its Liquid Carbonic division,
"[T]hus depriving independent suppliers of these gases the opportunity to compete." 42 The government contends that this, "[R]eciprocity plan has been effectuated
by contracts, agreements and understandings,
express and implied, entered into
' 43
between General and its suppliers.
The situation giving rise to the complaint against General Motors further illustrates what government attorneys, as well as economists, feel are the economic
39
40
41
42
43
Consolidated Foods Corp., supra note 36, at 20,978.
Id. at 20,977.
Complaint, United States v. General Dynamics Corp., filed (S.D.N.Y. Nov. 8, 1962).
Ibid.
Id. at 8.
NOTRE DAME LAWYER
conditions necessary for reciprocity and how this device in turn can affect growth.
point out that as long as General Motors was
Thus, Stocking and Mueller
primarily a producer of automobiles it had little incentive or opportunity to resort
to reciprocal buying. As it broadened the scope of its operations, more particularly
45
"[I]ts opas it engaged in the production of goods used by other industries,
4
portunities to utilize its purchasing power to increase its sales have multiplied.1
In describing General Motors' expansion into the field of manufacturing diesel
locomotives, these authors, as well as the government, point to the unpretentious
acquisition of Winton Engine Co. in 1930, and General Motors' present position
as the country's largest maker of diesel locomotives. 47 "Many factors no doubt
contributed to this dramatic growth . . . but . . . it would be strange indeed if
General Motors' heavy purchases of transportation services were not also an im48
portant factor in General Motors' outstripping all rivals in selling diesels."1
49
In its complaint, the justice department contends that General Motors, the
largest shipper of freight on the railroads of the United States, violated Section 2
of the Sherman Act 50 by illegally monopolizing the railroad locomotive business.
The government points out that Electro Motive Division, one of General Motors'
acquisitions, is now the largest manufacturer of diesel-electric railroad locomotives.
The complaint charges that General Motors used its tremendous volume of freight
shipments illegally to induce railroads to buy their requirements of locomotives
from General Motors' subsidiary, Electro Motive Division, thus monopolizing the
locomotive industry. The result, according to the government, has been that two
of General Motors' competitors have not sold a locomotive since 1958. This power
over price and the power to exclude competitors in the railroad locomotive industry
was brought about, the government contends: (1) by giving preference in routing
freight to railroads which purchase locomotives from Electro Motive Division;
(2) by routing freight traffic so as to remove or reduce the volume of freight traffic
shipped over the lines of railroads which purchase locomotives from competitors
of Electro Motives Division; and (3) :
[B]y discussing or referring to General Motors' freight shipments during
the course of sales efforts for its locomotives and by discussing or referring
to the railroad's purchase of locomotives from Electro Motives Division or its
44 Stocking & Mueller, Business Reciprocity and the Size of Firms, 30 J. OF Bus. OF THE
U. OF CHICAGo 73, 75 (1957).
45 Especially see generally, Stocking & Mueller, supra note 44. This is especially true with
respect to the railroad industry. General Motors is not only a large buyer of railway services
but sells many products essential to railroads. Its Hyatt Bearing Division is one of the country's
leading makers of railway journal boxes and bearings for diesel locomotives and for passenger
and freight cars. Its Allison Division makes transmissions for passenger and freight cars. Its
Frigidaire Division produces complete air conditioning equipment for railway cars. Its Delco
Products Division makes motors and generators for heating, cooling, and power, all of which
are required for diesel locomotives. Its Electro-Motive Division makes diesel locomotives.
46 Stocking & Mueller, supra note 44, at 89-90.
47 Id. at 90.
From these simple beginnings General Motors had become by 1955 the
country's largest maker of diesel locomotives, accounting for more than
three-fourths of all domestic sales.
48 Id. at 91. Despite the testimony of General Motors officials that General Motors deliberately renounced the use of "traffic reciprocity," one competitor testified: "I think we would
be naive to assume that General Motors' tremendous volume of traffic over the railroads does
not have a profound influence on railroad purchasing." Testimony of 0. De Gray, Hearings
before Subcommittee on Antitrust and Monopoly of Senate Committee on the Judiciary, 84TH
CONG., IsT SEss. (1955) at p. 2370.
49 Complaint, United States v. General Motors, filed (N.D. Ill. Jan. 4, 1963).
50 § 2 states in part:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part
of the trade or commerce among the several states . . . shall be deemed
guilty of a misdemeanor. ...
NOTES
competitors5 in the course of dealings in relation to the routing of its freight
shipments. '
It is obvious that the first two situations, if proved, would comprise sufficient
coercive activity which, when combined with substantial economic power, would
render the plan illegal under the Federal Trade Commission Act, as these are
precisely the tactics utilized in Waugh and California Packing. However, the government must go further and prove the illegal effect on competition resulting from
this practice - creation of or attempt to create a monopoly. Thus, the court's
determination of the legality or illegality of the third type of activity takes on
added importance. The government in this charge is contending that the mere
discussion by General Motors of its freight shipments when it is in the process of
selling locomotives to railroads, or the discussion of its connection with Electro
Motives Division when it is discussing the routing of traffic with railroads, would
be sufficient coercive "activity" to constitute a violation of the Sherman Act, when
combined with the economic leverage and the anticompetitive effect. Certainly
the coercion or intimidation here is less odious than that evidenced in the Federal
Trade Commission cases, or the activity complained of in the first two allegations
52
against General Motors. In a recent complaint against a soda ash producer,
the government reiterated its insistence that even a low degree of intimidation
is reprehensible. In this situation, the "coercion" complained of was a suggestion
in a letter from an executive of this company to an executive of Ford Motor Co.
to the effect that FMC would be willing to purchase large numbers of Ford
53
automobiles in return for Ford's continued purchases of FMC's soda ash.
Thus, the court's discussion of these allegations may prove helpful in delineating just
how slight an activity is sufficient to constitute coercion. It might very well be that
only slight intimidation is required when that activity is combined with great
economic leverage, and a more coercive reciprocity program required when the
economic power is less substantial.
One of the basic problems in the successful maintenance of an action based
on the Sherman Act, or section 5 of the Federal Trade Commission Act, is the
necessity of proving the activities upon which the complaint is predicated. Since
the complaints against General Motors and General Dynamics allege the illegal
combination of economic leverage and overt coercion used to enforce a plan of
reciprocity by a meaningful economic threat, the government is put to the proof of
such coercive activity. It can be generally stated that while the fact that a company
engages in reciprocity may be- public knowledge, the elements of the necessary proof
of the inner workings of these reciprocal transactions are generally closely guarded
secrets. 54 This problem of proof is emphasized by the fact that in both complaints
51 Complaint, United States v. General Motors, supra note 49, at 12.
52 The Wall Street Journal, Dec. 4, 1963, p. 1, col. 6, indicates that material turned up
by a Government suit against FMC Corp., a supplier of soda ash, suggests that this company
uses reciprocity.
53 One such letter from an executive of FMC Corp. to a Ford Motor Co. vice-president
said in part:
This is just a note to express . . . appreciation . . . for the good news we
had that your company has decided to purchase part of your Nashville requirements for soda ash from our company.
Effective as of now wherever possible, our people are to purchase Ford
Products....
The Wall Street Journal, Dec. 4, 1963, p. 1, col. 6.
54 In Lewis, The Present Status of Reciprocity as a Sales Policy, 16 HARv. Bus. -Rv. 299,
312 (1938), the author concluded:
One of the most interesting things about this whole problem is the
extreme reticence with which many businessmen talk about reciprocity.
Some deny that their companies practice it, even in the face of common
knowledge to the contrary. Others deny it publicly, but will occasionally
admit in confidence that they do follow it, and even describe in considerable
detail their method of handling the problem. Still others, although they
NOTRE DAME LAWYER
there is also an alleged violation of section 7 of the Clayton Act, which, as will be
pointed out, requires no proof of coercive activity. It appears that the government,
by buttressing its complaint with the Clayton Act, is acknowledging the difficulty of
proof required under the Sherman Act. This difficulty of proof has great significance
in the area of straight-line reciprocity in which no third corporation or subsidiary
is involved, 55 thus negating the possibility of a Clayton Act violation. The government's success in producing the required proof, and the judicial determination of
the activities necessary to prove coercion - whether mere insinuations, or outright threats - will greatly affect further reciprocity complaints under the Sherman Act.
Under Section 7 of the Clayton Act:
Perhaps the area where reciprocity poses the greatest problem to large diversified corporations is the increasing possibility that the government agencies may,
in situations where its anticompetitive effects are patent, make widespread use of
it to pry apart "conglomerate" mergers under the Clayton Act. Section 756 of the
Clayton Act is designed to arrest in its incipiency, not only the substantial lessening
of competition from the acquisition by one corporation of the whole or any part
of a competing, or even noncompeting corporation, but also to arrest in their incipiency restraints or monopolies in a relevant market which, "[A]s a reasonable
probability, appear at the time of the suit likely to result from the acquisition ....
This section is violated whether or not actual restraints or monopolies, or the substantial lessening of competition, "[H]ave occurred or are intended. '58 Thus, it
must be emphasized that in a section 7 case (as distinguished from one brought
C.
state quite frankly that they have such a policy, refuse to discuss even the
general organization and procedure for handling the problem.
The Wall Street Journal, Dec. 4, 1963, p. 1, col. 8, reports that General Motors was so
reluctant to bare documents related to the subject that it fought government subpoenas for
two years. Only recently has General Motors begun to hand over the papers, and most of these
are under a court protective order, which restricts availability of the documents to specified
Justice Department personnel.
55 The record in United States v. Du Pont Co., 126 F. Supp. 235 (N.D. Ill. 1954), is one
of the most informative sources of knowledge as to the inner workings of an effective plan of
straight-line reciprocity, and the apparent lack of secrecy surrounding the situation is, to say
the least, quite unusual. For example, Stocking & Mueller, supra note 44, at 81 and 83, reprint
two letters illustrative of the extent of the organization:
Having secured the cooperation of the Purchasing Department, who
agreed to send us copies of all their orders and contracts . . . we devised a
system to take care of this data, carding up all the names and indicating by
signals important information. In addition we advise our sales executives
and branch offices of purchases not only daily, but also by means of statements monthly and a general summary semiannually, showing the status of
all concerns from whom we buy....
[W]e desire to put before the Jones & Laughlin Steel Company interests
and the Inland Steel Company interests the facts as to what of their products
the du Pont Company and its affiliated companies buy from them. For this
purpose could you have someone send me a statement of the 1927 purchases
by General Motors Corporation and its subsidiaries from . . . [them]....
It is, of course, understood that in presenting these figures to our customers it will be for the purpose of retaining trade now enjoyed. There will
be no promise or assurance that these purchases will continue or that the Du
Pont Company's efforts in the past have caused G.M. to place this
business ...
56 § 7 of the Clayton Act states in part:
No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no
corporation subject to the jurisdiction of the Federal Trade Commission shall
acquire the whole or any part of the assets of another corporation engaged
also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or
to tend to create a monopoly.
57 United States v. Du Pont & Co., 353 U.S. 586, 589 (1957).
58 Ibid.
NOTES
under the Sherman Act, or section 5 of the Federal Trade Commission Act), "T]he
inquiry does not focus on overt anticompetitive trade practices as such, but rather
on changes in market or industry structure that are effected by the challenged merger
and that may have anticompetitive consequences." 5
Thus, section 7 is directed, "[Ait the anticompetitive effect of anticipated
business practicis that would be immune from legal attack had the structure of
the merged corporation been developed by growth rather than acquisition."60
While a cease and desist order would eliminate any overt reliance on reciprocity
as might be proved, "[I]t would do nothing to eliminate the anticompetitive effect
inherent in the corporate structure created by the merger."'6
Congress used the words "may be substantially to lessen competition,"
. . . to indicate that its concern was with probabilities, not certainties,
Statutes existed for dealing with clear-cut menaces to competition..
Mergers with a probable anticompetitive effect were to be proscribed by this
62
Act.
There are two very real advantages to the government in attacking reciprocity
under section 7. First, since they are concerned with probabilities of anticompetitive
effect, the extensive burden of proof, required under both the Sherman Act and
the Federal Trade Commission Act, to show overt, coercive and intentional activity
is substantially lessened, and perhaps may be completely unnecessary. Second, whife
the sanction for a Federal Trade Commission Act violation is a cease and desist
order, and treble damages can be recovered under the Sherman Act, the sanction
imposed under section 7 is divesture of the acquisition, characterized in the Du Pont
case as, "What most drastic, but most effective, of antitrust remedies."8' 3 Thus, the
severity of the penalty combined with the tendency of section 7 to require less proof
of coercive activity, accentuates the threat which reciprocity prosecutions pose to
conglomerate mergers.
Consolidated Foods Corp.14is the first case in which a conglomerate merger
was successfully attacked under section 7 of the Clayton Act. The decision requiring divesture was based solely on the corporate structure produced by a merger
facilitating reciprocal buying which in turn produced an anticompetitive effect.
Consolidated Foods was a large food wholesaler which operated eight manufacturing divisions and processed certain food products. In 1951 Consolidated acquired
Gentry Inc., a supplier of dehydrated onion and garlic, one of only four firms that
constitute the entire dehydrated garlic and onion industry.
The gravamen of the case was that the merger with Gentry was illegal under
section 7 of the Clayton Act, "[Bjecause it created the serious danger that Gentry
would acquire a protected market, in which fair competitive opportunities would
be denied to other sellers of dehydrated onion and garlic, as a result of the trade
practice known as 'reciprocity.' "65 The first question presented to the Federal Trade
Commission was whether the effect of the acquisition, "[May be substantially to
lessen competition." 66 The respondent contended that the proof of such substantiality
was lacking and introduced a statistical presentation that Gentry had not come
6
to dominate the industry in the years since the mergerY.
The commission answered
this contention:
Respondent seems to think that it cannot be found to have violated
section 7 since it has not driven competitors from the field or sharply curtailed their sales. But we have already indicated that our inquiry must focus
on probable effect, and that one such probable effect of respondent's acquisi59
Consolidated Foods Corp., supra note 36, at 20,974-5.
60 Id. at 20,979.
61 Ibid.
62 Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962).
63 United States v. Du Pont & Co., 366 U.S. 316, 326 (1961).
64 FTC Docket No. 7000, Trade Reg. Rep. FTC Complaints, Orders, Stipulations, Par.
16,182 at 20,972 (1962).
65 Id. at 20,974.
66 Id. at 20,975.
67 In fact, the statistics showed that Gentry's sales had fallen.
NOTRE DAME LAWYER
tion of Gentry is the discouragement of new competition. This could occur
even if Gentry does not drive competitors from the field or obtain unilateral
industry dominance. If reciprocal buying creates for Gentry a protected
market, which others cannot penetrate despite superiority of price, quality,
or service, competition is lessened whether or not Gentry can expand its
market share. 68
The Commission then concluded that the acquisition of Gentry by Consolidated
has conferred upon Gentry the power to foreclose competition from a substantial
share of the markets for dehydrated onion and garlic:
[T]hereby jeopardizing the competitive opportunities of its small, relatively undiversified competitors and tending to lend further rigidity to an
already heavily concentrated industry and to discourage the entry of new
competitors, all "without producing
any countervailing, competitive, economic, or social advantages." 6 9
The Commission goes on to describe the way in which such a conglomerate
merger may enhance the likelihood that reciprocity may be practiced to stifle
competition:
Diversification not only increases the number of opportunities for reciprocal buying; it increases their magnitude. A single-line producer, even
though a near-monopolist, may buy so little of some material that reciprocal
buying has little influence on suppliers as potential customers. But by diversifying - making other products requiring the same input - a firm may
so enlarge its buying as to give it the power to increase its sales.70
Relating this principle to the consolidated situation, the commission points out
that the acquisition of Gentry presented Consolidated with an opportunity, previously unavailable, to reap a profit from sales in one product area, dehydrated
onion and garlic, "[O1n the sheer strength of its buying power in other markets,
and not on the basis of a better product or a lower price. 17 1 Furthermore, the
Commission found that Consolidated admittedly did overtly exercise this power
on occasion with some success, but then went on to say that since Consolidated acquired the power to "extort or simply attract" reciprocal purchases from suppliers
when it acquired Gentry, "[T]he casual relationship between the
merger and
72
the injury to competition implicit in reciprocal buying is patent.)
While respondent has admitted the overt exercise of the power inherent
in its corporate structure, expressly conditioning purchases from processors
on their purchases from Gentry, it seems clear that merely as a result of its
connection with Consolidated, and without any action on the latter's part,
Gentry would have an unfair advantage over competitors
enabling it to
make sales that otherwise might not have been made. 73
Thus, this case indicates a classic example of three way reciprocity. As a wholesaler and retailer of food, Consolidated buys the products of many food processors.
A substantial number of these processors require dehydrated onion and garlic
in packaging their foods. The commission pointed out that these food processors
who used dehydrated onion or garlic and, "[A]re anxious to sell or to continue
to sell their products to Consolidated, will, to say the least, consider Gentry's
74
connection with Consolidated in selecting a source of supply of onion and garlic."
The basic difference, then, between this case and those under the Sherman
Act or the Federal Trade Commission Act is that in this situation the advantages
accruing to a supplier who favors Gentry would not have to be pointed out by
Consolidated in order to violate the Clayton Act. The commission stated that the
fact that Consolidated failed to systematize or vigorously enforce its reciprocal
buying policy was of far less significance than that it "obtained the power to do
so by merger," and that by actually using its power on occasion to "disadvantage
competitors unfairly," Consolidated, "[D]emonstrated that its possession of such
68
69
70
71
72
73
74
Consolidated Foods Corp., supra note 64, at 20,981.
Id. at 20,981-2.
Id. at 20,978.
Ibid.
Ibid.
Id. at 20,979 (emphasis added).
Id. at 20,975.
NOTES
power posed a real
and substantial, and not merely abstract or theoretical, threat
75
to competition."
Section 7 reads "may be," not "has." The evidence may show that the
respondent has not thus far severely impaired competition in the industry
by reciprocity but it does not show that respondent may not do so when it
chooses or that it will not so choose in the future. * * *
Any suggestion that such power cannot effectively be exploited fails to
account for clear-cut historical instances when it has been. ... Indeed...
the industry 7structure
seems tailor-made to the exploitation of reciprocal
buying power. 6
As was already pointed out the Consolidated Foods case was the first time
that the Federal Trade Commission has overruled a merger under the terms
of the Clayton Act without finding the usual "horizontal" or "vertical" competitive effects. "An economic arrangement between companies performing similar
functions in the production or sale of comparable goods is characterized as horizontal. 7 7 However, in this case, Consolidated and Gentry were not competitors
but were in diversified lines of manufacture so no "horizontal merger" was involved. Furthermore, there were no "vertical" aspects of the merger, that is, no,
"[E]conomic arrangements between companies standing in a supplier-customer
relationship,"78 because any sales from Gentry to Consolidated were insubstantial.
The Commission thus relied on the legislative history of amended section 7 that
makes it clear, that the bill applies to all types of mergers and acquisitions, vertical
and conglomerate as well as horizontal which have the specified effects of substantially lessening competition.
....
79
The Brown Shoe Co. v. United States,s0 case also pointed out the applicability
of section 7, not only to mergers between actual competitors, "[B]ut also to vertical
and conglomerate mergers whose effect may tend to lessen competition in any
line of commerce in any section of the country." 8' However, Commissioner Elman,
who wrote the opinion in Consolidated, indicated that the effects of reciprocity
in a conglomerate merger situation were very similar to a vertical merger and
also to product tying arrangements. -A greater insight into the illegal anticompetitive effects of reciprocity then can be gained by comparing it to these traditional forms of trade restraints.
D.
Comparison to Vertical Merger:
In a vertical merger, the danger to competition lies in the likelihood that
the union of the previously independent supplier and customer companies, "[W]ill
foreclose their share of the market to competitors who previously had an equal
opportunity either to buy from the supplier company or to sell to the customer
company."8 2 The Court in Brown Shoe stated: "Every extended vertical arrangement by its very nature . . . denies to competitors of the supplier the opportunity
to compete for part or all of the trade of the customer-party to the vertical arrangement."8 13 The same results clearly follow from a conglomerate or diversification
merger in which reciprocity is effectively practiced. Here, competition will be adversely affected if the reasonable likelihood arises that the subsidiary's competitors
will be to some extent foreclosed, by the merger, from having the opportunity of
selling to that portion of the market composed of the parent's suppliers. "Consequently, the extent of potential foreclosure greatly exceeds that resulting from
the slight vertical relationship between Gentry and Consolidated.""
75
76
77
78
79
80
81
82
83
84
Id. at 20,980.
Ibid.
Brown Shoe Co. v. United States, 370 U.S. 294, 334 (1962).
Id. at 323.
H.R. Rep. No. 1191, 81st Cong., 1st Sess., p. 11.
370 U.S. 294 (1962).
370 U.S. 294, 317 (1962).
Consolidated Foods Corp., supra note 64, at 20,975.
370 U.S. 294, 324 (1962).
Consolidated Foods Corp., supra note 64, at 20,975.
NOTRE DAME LAWYER
E. Similarity to Product Tying Arrangements:
In many respects, reciprocal buying bears a close resemblance to the unlawful
business practice of entering into tying arrangements, i.e., agreements by one party
to sell one product only on condition that the buyer also purchase a different product. The latter product is said to be "tied" to the former 85 Where such conditions
are successfully exacted, competition on the merits with respect to the tied product
is inevitably curbed. "Indeed tying agreements serve hardly any purpose beyond
the suppression of competition." ' As 7the Supreme Court pointed out in Northern
Pacific Railway Co. v. United States:
They (tying arrangements) deny competitors free access to the market
for the tied product, not because the party imposing the tying requirements
has a better product or a lower price but because of his power or leverage
in another market. At the same time buyers are forced to forego their free
choice between competing products....
Again, in the Brown Shoe case, the court stated:
The usual tying contract forces the customer to take a product or brand
he does not necessarily want in order to secure one which he does desire.
Because such an arrangement is inherently anticompetitive, we have held
that its use by an established company is likely "substantially to lessen competition" although only a relatively small amount of commerce is affected.es
Similarly, "[R]eciprocal buying may also enable one seller to succeed over another
not on the basis of a better product or a lower price but because of his power or
leverage in another market;"8 9 viz., the market in which the seller is an influential
buyer of other products. A frequent condition, express or implied, of his purchase
of goods from his supplier is that the supplier also buy from him. "The prospective customer 'ties' the sale of his product to his purchases from his supplier and
competition on the merits with respect to the tied product is inevitably curbed." 90
By acquiring Gentry, Consolidated has provided itself with a basis on which to
tie sales to its suppliers to purchases from them.
Thus, Consolidated demonstrates the Commission's position that reciprocity
is illegal under section 7 even without a showing of overt coercion. The fact that
a company has obtained the "power" to coerce by merger is sufficient regardless
of whether that power was ever effectively utilized. Consolidated's latent force
of buying power, combined with the need among Consolidated's suppliers for
the products sold by Gentry, resulted in a high probability of potential foreclosure
of Gentry's competitors from the market. "Since Consolidated acquired the power
to extort or simply attract reciprocal purchases from suppliers when it acquired
Gentry,""' and the injury to competition resulting from the use of reciprocity in
such a situation is highly probable, the Federal Trade Commission ordered Consolidated to divest itself of Gentry.
A more recent decision involving reciprocity under Section 7 of the Clayton
Act, and one which appears to take the ConsolidatedFoods decision one step further
is United States -v. Ingersoll-Rand Company.9 2 In this case the government
used an argument similar to that in Consolidated Foods to block a proposed merger
between Ingersoll-Rand and three large coal mining machinery producers. There
was obviously no question here of any overt coercive activity in the reciprocity
area because the merger was never consummated, but the district court found
that the merger would create a corporate structure which in turn would facilitate
the practice of reciprocity and result in an injury to competition; on this basis
the court granted an injunction against the merger. The court pointed out that
85
86
87
88
89
90
91
92
Id. at 20,977.
Standard Oil Co. of California v. United States, 337 U.S. 293, 305 (1949).
356 U.S. 1, 6 (1958).
370 U.S. 294, 330 (1962).
Consolidated Foods Corp., supra note 69, at 20,977.
Ibid.
Id. at 20,978.
218 F. Supp. 530 (W.D. Penn. 1963).
NOTES
Ingersoll-Rand's position as the fourth largest general industrial machinery
manufacturer requires it to purchase large quantities of steel and that its purchases are important to the steel companies. In turn, the steel industry constitutes
one of the largest markets for coal. The court then pointed out that it would not
be overly speculative to assume that, "[IThe judicious use of its steel purchasing
power by Ingersoll-Rand could immeasurably increase the sales by the acquired
companies of machinery and equipment to the coal mining companies which
acutely need the continued goodwill of the steel industry."93 The court then went
on to explain again the "latent power to foreclose competition" theory laid down
in Consolidated:
Moreover, the mere existence of this purchasing power might make its
(Ingersoll-Rand's) conscious employment toward this end unnecessary; the
possession of the power is frequently sufficient, as sophisticated businessmen are quick to see the advantages in securing the goodwill of the
possessor. Certainly the steel producer who seeks orders from IngersollRand may tend to prefer the acquired companies as the source of supply of
equipment used in his "captive" mines, and the advantages accruing to him
from so favoring the acquired companies would not have to be pointed out
by Ingersoll-Rand .... The competitor may thereby suffer loss because of
a circumstance not bearing directly on the worth of his product. In this situation it is the relative size and conglomeration of business rivals, rather than
their competitive ability, that may determine success. Obviously, this practice strikes at one of the basic premises of a free enterprise economy.
Therefore, 9a merger which would result in its extension should be closely
scrutinized. 4
Conclusion:
As both Consolidated Foods and Ingersoll-Rand indicate, the government
may now look at a proposed conglomerate merger and decide if it would foreclose competition from a market because of reciprocity. If such foreclosure appears likely to occur, the government can immediately seek an injunction to prevent the merger without being required to wait for the adverse effect on competition. The seriousness of this is emphasized by the ever lessening degree of
"substantiality" of probable foreclosure now required as a result of the Brown Shoe
and Consolidated Foods decisions. Thus, it can be readily seen that if any large
company wishing to merge with a wholly unrelated company could exercise extensive power in one market to induce purchases from its acquisition, such power
alone would be sufficient to block the proposed merger. This would tend to make
large-scale buying power unlawful per se when combined with a certain corporate
structure, i.e., one where reciprocity could be effectively practiced. There would
be no requirement that this large-scale buying power ever be used to injure
competition.
In the straight-line reciprocity area, where no merger is involved, the government will have a more difficult time maintaining an action under the Sherman
Act. The necessity of proof of reciprocity practices, combined with corporate
secrecy as to the inner workings of any reciprocal purchasing plan indicates that
the government may choose to stress the antimerger area rather than the attempted monopoly area. If the General Motors and General Dynamics decisions
point out a tendency to hold inferences as well as outright coercive activities as
reprehensible, it is submitted that the slighter burden of proof then required for
the Sherman Act should make it unnecessary to take such an extreme position
under the Clayton Act as indicated by Consolidated and Ingersoll-Rand. Certainly in the case of a corporation which has never shown a tendency to practice
reciprocity the government should be required to prove some activity or tendency
to activity on the part of such corporation, however slight, before they can block
an acquisition or order a divesture.
Hurley D. Smith
93 Id. at 552.
94 Ibid.